An Overview of the Thai Agricultural Futures Market

1
An Overview of the Thai Agricultural Futures
Market

• By
• The Office of the Agricultural Futures Trading
  Commission
• Prepared for the CFTC Symposium, 18-25 October
  2004

2
Historical Development of Commodity Future
Trading in Thailand

• AGRICULTURAL FUTURES
• TRADING ACT 15 October
  1999
• BOARD OF THE AFTC 1 May 2001
• BOARD OF THE AFET 20 September 2001
• FIRST DAY OF TRADING 28 May 2004

3
Highlights

• THAILAND World Leader in Agricultural
• Products
• AFET Young Exchange with Efficient
• Operations
• AFTC Supporting Regulator with
• International Standards

4
THAILAND World Leader in Agricultural Products
Example
Unit million tons
Agricultural Product/ Year Production Production Thailands Ranking Export Export Thailands Ranking
Agricultural Product/ Year World Thai Thailands Ranking World Thai Thailands Ranking
Rubber (2003) 7.98 2.87 1 5.71 2.59 1
Rice (2003/04) 386.98 17.70 6 24.80 9.00 1
Cassava (2003) 189.02 18.43 4 14.09 11.62 1
Sugar (2003) 148.82 7.30 6 51.19 5.18 3
Data as of 2002 Source Rubber-Office of
Agricultural Economics, Rice- United States of
Department of Agricultural (as of September
2004), Cassava- Food and Agriculture
Organization, Sugar-Office of Agricultural
Economics
5
AFET Young Exchange with Efficient Operations

• Agricultural Futures Exchange of Thailand (AFET)
• Established 2001
• First Day of Trading 28 May
  2004
• Trading Clearing Systems Fully
  computerized
• 
  with web-based technology
• Rules Regulations
  International standards
• Strong Fundamentals World leading
  producer in
  
• 
  agricultural products

6
AFTC Supporting Regulator withInternational
Standards

• Agricultural Futures Trading Commission (AFTC)
• Governing Law Agricultural Futures
  Trading Act
• B.E.
  2542 (1999)
• Established 1 May 2001
• Philosophy Investor
  Protection, Price
  
• 
  Efficiency, and Market Liquidity
  

7
Agricultural Futures Exchange Thailands First
Futures Exchange
8
AFETs Profile

• The Agricultural Futures Exchange of Thailand
• Established under the Agricultural Trading Act
  B.E. 2542 (1999) to be the sole Agricultural
  Futures Exchange in Thailand
• Initially set up and funded by the Government
• Regulated by the Agricultural Futures Trading
  Commission (AFTC) and the Office of the AFTC

9
Regulatory Structure

• AFTC

• The Board of Directors comprises
• the Minister of Commerce as Chairperson and
• 4 Persons the Permanent Secretary of the
  Ministry of Finance, the Permanent Secretary of
  the Ministry of Agriculture and Co-operatives,
  the Permanent Secretary of the Ministry of
  Commerce, and the Governor of the Bank of
  Thailand and
• 5 Persons appointed by the Cabinet of Ministers

Mr. Chaipat Sahasakul, the Secretary-General of
the Office of the AFTC
AFET
The Board of Directors comprises Dr. Suvarn
Valaisathien as Chairperson and 5 Persons
appointed by the AFTC and 5 Persons elected by
AFETmembers
Mrs. Napaporn Kurupasutachai, President of the
AFET
10
AFETs Commitment

• "To be an efficient marketplace for commodity
  futures trading and hedging with a high degree of
  integrity, transparency and accountability"

11
Futures Traded on the AFET

• Rubber Futures
• (Ribbed Smoked Sheet No.3 Rubber RSS3)
• Rice Futures
• (5 Broken White Rice WR5)

12
Contract Specifications for Ribbed Smoked
Sheets No. 3 Rubber (RSS3)

• Description of Commodity
• RSS3 according to the Green Book
• Contract Months
• Six consecutive months from the spot month
• Trading Hours
• 1030- 1200am.
• Contract Size
• 5,000 kg (5 metric tons)
• Tick Size
• 0.1 Baht per kg
• Daily Price Limit
• Depend on the standard price
• Position Limits
• 500 contracts for all contract months combined
  and/or 100 contracts for
• the spot month
• Delivery Point
• FOB term at Bangkok port as par delivery point
• Last Trading Day
• The third business day prior to the first day of
  delivery month

13
Contract Specification for 5 Broken White
Rice (WR5)

• Description of Commodity
• 5 Broken White Rice according to the Thai
  Ministry of Commerces Standard
• Contract Months
• Jan, Mar, May, July, Sept, and Nov
• Trading Hours
• 1030- 1200 am.
• Contract Size
• 15,000 kg (15 metric tons)
• Tick Size
• 0.02 Baht per kg
• Daily Price Limit
• Depend on the standard price
• Position Limits
• 1,000 contracts for all contract months combined
  and/or 200 contracts for the spot month
• Delivery Point
• At AFETs designated warehouses in Bangkok
• Last Trading Day
• The fifth business day prior to the first day of
  delivery month

14
Becoming an AFET Trading Member

• Only a member has privilege of directly trading
  on the AFET.
• The following members may trade on the AFET
• Trader Member, acting only on its own account,
  and
• Broker Member, acting on its own account or on
  behalf of customers.
• Each member must also be a clearing member of the
  AFET clearing house.

15
AFET Clearing Structure

• Only clearing members may register and clear
  trades with the AFET clearing house
• AFET clearing house is counter-party to all
  matched contracts

16
AFET Clearing Rules

• Clearing services are provided by AFET clearing
  house
• All trades must be cleared on T1
• Before trading, investors will be required to
  lodge initial margin with the brokerage firm to
  ensure performance of the futures contract
  obligation
• Once traded, open positions will be
  marked-to-the-market at the end of every trading
  day
• If equity value in the investors account falls
  below a certain level, a call will be issued to
  deposit money into the account up to the initial
  margin level (maintenance margin)

17
Clearing Member Financial Requirements
Type Financial Requirements Financial Requirements Financial Requirements Clearing Fund Security deposit
Type Equity (paid-up) ANC ANC/Client Margin Clearing Fund Security deposit
GCM gt US476,190 gt US250,000 gt10 gt US595,238
CCM gt US297,619 (for broker) gt US178,571 (for trader) gt US250,000 gt10 gt US357,143
GCM-General clearing member and CCM-Corporate
clearing member 1 US dollar 42
Thai Baht, approximately
18
Margin Rate
Product Normal-month Normal-month Spot-month Spot-month
Product Initial Margin Maintenance Margin Initial Margin Maintenance Margin
5 Broken White Rice (US dollar) (US dollar) (US dollar) (US dollar)
Hedger 110 110 843 843
Speculator 148 110 1,121 843
Ribbed Smoked Sheet No.3 Rubber (US dollar) (US dollar) (US dollar) (US dollar)
Hedger 302 302 1,512 1,512
Speculator 402 302 2,012 1,512
Note 1 US dollar 42 Thai Baht, approximately
19
Transaction Fee Structure
Type of Fee Detail
Exchange Clearing Fee 50 Baht /side/contract for rubber 25 Baht/side/contract for rice (until Dec 31st 2004)
Commission 0.1 0.25
20
Overview of Rubber and 5 Broken White Rice
Futures Trading
21
Highlights

• 1. Overall Volumes and Open Interests in AFET
• 2. Rubber Volumes and Open Interests in AFET
• 3. Comparison of Thai Rubber Futures and Spot
  Prices
• 4. 5 Broken White Rice Volumes and Open
  Interests in AFET
• 5. Comparison of 5 Broken White Rice Futures
  and Spot Prices

22
Overall Volumes and Open Interests in AFET
Source Agricultural Futures Exchange of
Thailand Note that rubber and 5 broken white
rice were launched on May 28, 2004 and August
26, 2004, respectively.
23
Rubber Futures Prices, Volumes and Open Interests
in AFET
Source Agricultural Futures Exchange of Thailand
24
Comparison of Thai Rubber Futures and Spot Prices
Source Agricultural Futures Exchange of
Thailand and Rubber Research
Institute, Thailand
25
5 Broken White Rice Futures Prices, Volumes and
Open Interests in AFET
Source Agricultural Futures Exchange of Thailand
26
Comparison of 5 Broken White Rice Futures and
Spot Prices
Source Agricultural Futures Exchange of
Thailand and Department of Internal
Trade, Thailand
27
Overview of Regulatory and Development Framework
28
Highlights

• Major Regulatory Issues According to the
  Agricultural Futures Trading Act B.E. 2542 (1999)

1. Categories of Agricultural Commodities and
Futures Trading Businesses. 2. Regulatory
Structure. 3. Supervision of the Agricultural
Futures Exchange of Thailand. 4. Supervision of
Agricultural Futures Trading Businesses. 5. Invest
or Protection and Market Manipulation/
Over-Speculation Prevention. 6. Prohibited
Conducts.

29
Categories of AgriculturalCommodities and
Futures Trading Businesses.

• Agricultural Commodity means
• An agricultural produce or product processed from
  an agricultural produce which the Board of
  Directors of the Exchange has specified for
  futures trading.

Section 3 of the Agricultural Futures Trading Act
B.E. 2542
30
2. Regulatory Structure.
Agricultural Futures Trading Commission (AFTC)
supervises
supervises
Agricultural Futures Exchange of Thailand

supervises
Agricultural Futures Trading Business
Exchange Member
Futures Trader Futures Broker
31
Major Issues Regarding Regulatory Supervision of
the Agricultural Futures Exchange of Thailand.

• Appointment of the Board of Directors of the
  Agricultural Futures Exchange of Thailand.
• Five persons appointed by the AFTC and other five
  persons elected by the members.
• Approval of rules, regulations, notifications,
  and orders issued by the Board of Directors of
  the Exchange.
• For example
• principles for the prescription, alteration,
  modification, or cancellation of Agricultural
  Commodity.
• principles, procedures, and conditions concerning
  becoming a Member of the Exchange.
• Section 77 of the Agricultural Futures
  Trading Act B.E. 2542 (1999) (AFTC Act)
• Section 7(5) and 78(1) (4) (5)
  (8) (9) (10) (11) and (16) of the AFTC Act

32
4. Major Issues Regarding Regulatory
Supervision of the AgriculturalFutures Trading
Business.

• Issuance of licenses and supervision of Futures
  Trading Business operations.
• Prescription of principles for Futures Trading
  Business operations.
• Including principles for the maintenance of
  Futures Trading Business financial status.

Section 22 and Section 7(2) of the AFTC
Act. Section 32 of the AFTC Act. Section
34 of the AFTC Act.
33
4. Major Issues Regarding Regulatory
Supervision of the AgriculturalFutures Trading
Business (Cont.)

• Approval of the appointment of a director,
  manager, or person with power to manage the
  licensed business.
• Suspension and revocation of license and
  dissolution of Futures Trading Business.

Section 36 of the AFTC Act E.g.,
section 59 of the AFTC Act
34
5. Investor Protection and MarketManipulation/O
ver-Speculation Prevention.

• Tools for prevention of market manipulation and
  over-speculation.
• Prescription of Exchange member margin required
  and adjustment of such margin account.
• Prescription of daily price movement limits.
• Prescription of position limit of each member or
  customer.
• Market Surveillance System.

According to Section 78(4) (6) and (7) of the
AFTC Act.
35
5. Investor Protection and MarketManipulation/O
ver-Speculation Prevention (Cont.)

• Tools for prevention of market manipulation and
  over-speculation.
• Temporarily suspend the Futures Trading of
  Agricultural Commodity of certain categories for
  a specified period.
• Temporarily prohibit a Member from buying or
  selling Agricultural Commodity on the Exchange
  for a specified period.
• Dispose of or revoke a Futures Contract.

According to Section 104(1) (2) and (3) of
the AFTC Act.
36
6. Prohibited Conducts.
Under Thai Futures Law and Regulations
Relevant Futures Thai Law and Regulations

• Agricultural Futures Trading Act B.E. 2542 (1999)
  (AFTC Act)
• Notifications of the Agricultural Futures Trading
  Commission
• (AFTC)
• Notifications of the Office of the Agricultural
  Futures Trading
• Commission
• Notifications of the Board of Directors of the
  Agricultural
• Futures Exchange of Thailand (AFET)
• Notifications of the AFET

37
Prohibited Conducts by Law

• Corner
• Squeeze
• Dissemination of Misleading Information
• Wash Sale
• Insider Trading
• Churning

38
Prohibited Conducts by Notifications

• Trading Ahead Customers
• Trading Against Customers
• Bucketing
• Withholding Customer Orders
• Preferential Trading

39
Administrative Sanctions imposed by AFTC1 , AFET2

• Warning1
• Probationary Notice1,2
• Fine2
• Suspension of trading opration2
• Revocation of AFET Membership2
• Suspension of marketing officers license1
• Suspension of Futures Trading Business license1
• Revocation of marketing officers license1
• Revocation of Futures Trading Business license1

40
Corner

• Section 121 of the AFTC Act
• Sanctions
• 3 years imprisonment term and/or
• fine of US 7,142

41
Squeeze

• Section 119 of the AFTC Act
• Sanctions
• 6 months 5 years imprisonment term and
• fine of US 11,905 - 2 times of benefit
  received
• Section 121 of the AFTC Act
• Sanction
• 3 years imprisonment term and/or
• fine of US 7,142

42
Dissemination of Misleading Information

• Section 122 of the AFTC Act
• Sanctions
• 3 years imprisonment term and/or
• fine of US 7,142

43
Wash sale

• Section 119 of the AFTC Act
• Sanctions
• 6 months 5 years imprisonment term and
• fine of US 11,905 - 2 times of benefit
  received
• Section 121 of the AFTC Act
• Sanction
• 3 years imprisonment term and/or
• fine of US 7,142

44
Insider Trading

• Section 120 of the AFTC Act
• Sanctions
• 6 months 5 years imprisonment term
• and fine of US 11,905 - 2 times of
• benefit received

45
Churning

• Section 122 and 123 of the AFTC Act
• Sanctions
• 3 years imprisonment term and/or
• fine of US 7,142

46
AFTC Act

• Section 119. No person shall, directly or
  indirectly, make a futures trade or offer to make
  a futures trade, or do any acts involving Futures
  Trading to such a likely extent that another
  person understands that the traded Agricultural
  Commodity has a rising, falling, stable, or
  fluctuating price which is in conflict with the
  normal market conditions.
• (Squeeze, Wash Sale)

47
AFTC Act

• Section 120. No person shall, directly or
  indirectly, make a futures trade or offer to make
  a futures trade, or do any acts involving Futures
  Trading in such a way likely to be an act to take
  advantage of others by using facts concerning
  Futures Trading which have not been disclosed to
  the public and he knows by virtue of his office
  or performance of duty in such Futures Trading or
  he knows because he receives them from the
  aforementioned regardless of whether the
  foregoing acts are done for the benefits of
  himself or others, or by disclosing, in
  consideration of benefit, the foregoing facts for
  others to act.
• (Insider Trading)

48
AFTC Act

• Section 121. No person shall do any act to the
  extent that is likely to mislead another person
  to believe that there is a
• large volume of futures purchase or sale of
  Agricultural Commodity of any category or kind or
  that the price of the Agricultural Commodity of
  such category or kind has
• changed inconsistently or has not changed
  consistently with the normal market conditions. 
• (Corner, Squeeze and Wash Sale)

49
AFTC Act

• Section 122. No person shall impart or
  disseminate any false statement concerning an
  Agricultural Commodity or Futures Trading of an
  Agricultural Commodity of any category or kind or
  impart or disseminate any other statement that
  may cause others to be mistaken in the material
  respect concerning Futures Trading of an
  Agricultural Commodity of any category or kind
  and such act is likely to result in the price of
  such Agricultural Commodity to be inconsistent
  with the normal market conditions or likely to
  cause another person to engage in Futures
  Trading.
• (Dissemination of Misleading Information,
  Churning)

50
AFTC Act

• Section 123. No person shall assure or forecast
  for another person concerning an Agricultural
  Commodity or Futures Trading of an Agricultural
  Commodity of any category or
• kind if such assurance or forecast is false
  or may cause a mistake in the material respect
  and such act is likely to cause such person to
  engage in Futures Trading.
• (Churning)

51
Operating a Futures Trading Business in Thailand
52
Highlights

• A. Introduction to Futures Trading Business
• B. Qualifications of Licensees
• C. Fees

53
A. Introduction to Futures Trading Business

• Opportunities for Market Participants
• Trade through existing brokers
• Operate futures trading business
• Futures trader
• Futures broker
• Future trading advisor
• Futures pool business operator
• Those interested in operating a futures trading
  business must
• apply for a license from the AFTC and comply
  with principles, procedures, and conditions
  specified by the AFTC

54
B. Qualifications of Licensees

• Areas of Consideration
• 1. Legal Status and Shareholding Structure
• 2. Financial Stability
• 3. Operation Readiness
• Staff
• Systems
• Others

55
B. Qualifications of Licensees (Cont.)

• 1. Legal Status and Shareholding Structure
• Be legal person established under Thai law
• Have an objective to operate futures trading
  business
• Comprise Thai shareholders of more than 25 of
  the paid-up capital

56
B. Qualifications of Licensees (Cont.)

• 2. Financial Stability

Initial Requirements in terms of Shareholders
Equity
Unit US dollar
Types of Bus. Items Futures Traders Futures Brokers Futures Trading Advisors
Registered Capital At least 714,286 At least 1,190,476 At least 95,238
Paid-up Capital At least 178,571 At least 297,619 At least 23,810
Note 1 US dollar 42 Thai Baht, approximately
57
B. Qualifications of Licensees (Cont.)

2. Financial Stability ANC for Brokers
Warning Level

• 10.5 million baht (US250,000) or
• 10 of total segregated customer accounts
• Other criteria set by the AFTC

• In case of ANC shortfall
• Submit financial reports within the following
  business day
• Submit financial reports every day until the 20th
  business day after the requirement is met
• Submit a recovery plan within 5 business days
  after the date of shortfall

Note 1 US dollar 42 Thai Baht, approximately
58
B. Qualifications of Licensees (Cont.)

2. Financial Stability ANC for Brokers
Minimum Level

• 7 million baht (US166,667) or
• 5 of total segregated customer accounts
• Other criteria set by the AFTC

• In case of ANC shortfall
• Inform the AFTC immediately and submit a written
  confirmation on the following business day
• Submit financial reports within the following
  business day
• Be able to submit only orders to offset positions
  and transfer all customer positions to other
  brokers immediately
• Take any actions as prescribed by the AFTC

Note 1 US dollar 42 Thai Baht, approximately
59
C. Fees
Application Fee and License Fee
Fee Futures Trader Futures Broker Futures Trading Advisor
Total Fees 100,500 baht (US2,393) 125,500 baht (US2,988) 63,000 baht (US1,500)
Note 1 US dollar 42 Thai Baht, approximately
60
Liquidity-Driven Strategies in AFET
61
Liquidity-Driven Strategies in AFET

• 1. Margin rates adjustment
• 2. Exchange fees adjustment
• 3. Trading hours extension
• 4. New commodities listing
• 5. Futures trading education

62
How to contact AFTC and AFET?
63

• The Office of the Agricultural Futures
• Trading Commission (AFTC)
• Level 15, CRC Tower, All Seasons Place,
• 87/2 Wireless Road, Lumpini, Patumwan,
• Bangkok 10330 Thailand
• Tel [phone] Fax[phone]
• www.aftc.or.th
• The Agricultural Futures Exchange
• of Thailand (AFET)
• Level 15, CRC Tower, All Seasons Place,
• 87/2 Wireless Road, Lumpini, Patumwan,
• Bangkok 10330 Thailand
• Tel [phone] Fax[phone]
• www.afet.or.th